Study Guide Test 1 Credit Scores and FICO scores Credit bureau scores are often called FICO scores because most credit bureau scores used in the U S are produced from software developed by Fair Isaac and Company 1 Where they come from Each score is based on information the credit bureau keeps on file about you As this information changes your credit scores tend to change as well 2 What factors impact them For your three FICO scores to be calculated each of your three credit reports must contain at least one account which has been open for at least six months In addition each report must contain at least one account that has been updated in the past six months 3 What the number means FICO scores provide the best guide to future risk based solely on credit report data The higher the credit score the lower the risk 4 How might they impact you And while many lenders use FICO scores to help them make lending decisions each lender has its own strategy including the level of risk it finds acceptable for a given credit product There is no single cutoff score used by all lenders and there are many additional factors that lenders use to determine your actual interest rates 5 Having a good credit score a Things to do and not to do b What works to improve credit scores Check Your Credit Report Setup Payment Reminders Reduce the Amount of Debt You Owe Pay your bills on time If you have missed payments get current and stay current Be aware that paying off a collection account will not remove it from your credit report If you are having trouble making ends meet contact your creditors or see a legitimate credit counselor Keep balances low on credit cards and other revolving credit Pay off debt rather than moving it around Don t close unused credit cards as a short term strategy to raise your score Don t open a number of new credit cards that you don t need just to increase your available credit If you have been managing credit for a short time don t open a lot of new accounts too rapidly Do your rate shopping for a given loan within a focused period of time Re establish your credit history if you have had problems Note that it s OK to request and check your own credit report Apply for and open new credit accounts only as needed Have credit cards but manage them responsibly Note that closing an account doesn t make it go away Credit bureaus You have three FICO scores one for each of the three credit bureaus Experian TransUnion and Equifax Credit bureau reports Each score is based on information the credit bureau keeps on file about you As this information changes your credit scores tend to change as well Credit cards debit cards There are a few things that separate debit cards from credit cards A debit card is linked to your personal bank account and as soon as you make a purchase with a debit card the money is immediately withdrawn from the account associated with it There is no bill at the end of the month When you make a purchase with a credit card you are simply lowering your amount of available credit and you will receive a bill at the end of the month for which you are responsible Lastly the activity on a credit card shows up on your credit report but the activity on debit card does not 1 What they are and how they work 2 Compare and contrast their features 3 How they impact your credit score Blocking Proprietary technologies that look for anomalies in your spending habits What triggers a block Shopping where you ve never shopped before Making several purchases quickly Charging something small then something big Shopping away from your home base Charging travel expenses Buying things in different geographic regions on the same day Dealing with billing issues How to handle a block Carry backup credit cards Keep your card s contact info handy Tell your card company when you re traveling Use a prepaid card Get texts Provide a new address Ask for compensation Grace period The grace period is the time during which you are allowed to pay your credit card bill without having to pay interest The Credit CARD Act of 2009 requires that if issuers have grace periods they must last at least 21 days The grace period usually applies only to new purchases Most credit cards do not give a grace period for cash advances and balance transfers instead interest charges start right away Over the limit protection credit card companies are not permitted to charge over the limit fees unless you consent to over the limit protection While most credit card account holders can see the benefit of not being charged these fees many have become accustomed to that little cushion of protection that allows transactions that would otherwise be declined to go through the credit card processing system Here we look at a few reasons why you should not consider over the limit protection Manage your finances better Pay down debt Fees add billions to bank coffers Risk and return relationship You might have noticed that we talked about expected returns not actual returns When you invest in an investment vehicle that bears risk you do not know what the rate of return of your investment is going to be that s the nature of risk uncertainty You only have an expectation about the investment vehicle s rate of return In general this expectation will be based on the return the investment vehicle has produced over the past several years Keep in mind this simple rule the longer the past you use to calculate historical returns the more accurate your measure of expected returns Impact of time Over time however you will observe an average return The longer you stick with your investment vehicle the closer the average return will be to to the expected historical return That is in the long run risk is going to be rewarded It is important to stress this point Bad years for your investments are expected Bad years will happen You should not panic after one or two bad years Be patient In the long run bad years will be more than compensated with good years Patience in investments pays Interest Interest typically expressed as an annual percentage rate is the fee paid for the privilege of borrowing money This fee is the price a person pays for the ability to spend money today that would otherwise take time to accumulate Conversely if you were lending the money that fee interest compensates you for giving up the ability to spend that money today Debt Most of us are familiar with credit cards As mentioned earlier U S statistics show the average family has